Will Interest Rates Sink Stocks?

Javier Moore |Saturday, October 13, 2018

The Federal Reserve is not pleasing President Trump with its policy on interest rate increasesGETTY IMAGES

After two days of sharp drops in U.S. and global stock markets over fears of rising interest rates and the United States trade conflicts, Mnuchin said in an interview on CNBC that markets tended to go "too far in both directions" and then would have to correct.

It was the third consecutive day that Mr. Trump had criticized the Federal Reserve for raising interest rates; last night in Erie, Pennsylvania, the President said the Fed 'has gone insane'. "I think the Fed is out of control".

The central bank had raised the benchmark lending rate, which affects everything from mortgages to auto loans to bond yields, just twice before Mr Trump took office in January 2017, after a campaign in which he criticized the institution for allegedly keeping rates near zero in a bid to help his opponent.

Trump's public criticism of the Federal Reserve, whose chairman, Jerome Powell, Trump appointed, is a sharp departure from his recent predecessors. "I think our nominees have been absolutely first rate".

"The Fed is going wild", Trump told Fox News on Wednesday night. Still, while many investors might not concur with Dr. Trump's diagnosis, they might tend to agree with the underlying sentiment: USA interest rate hikes are or are going to rain on the stock market's parade.

Trump, who departed for Erie just before markets closed on Wednesday, was briefed by officials about the sell-off.

White House Press Secretary Sarah Sanders said in a statement following the close of markets that the USA economy is "incredibly strong" despite the sell-off, which analysts attributed in part to trade tensions with China.

"It is clearly a necessary development for those economies that are showing much improved growth, inflation that is picking up... unemployment that is extremely low", she told reporters in Bali where the Fund is meeting.

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Trump is objecting to the Federal Reserve's modest but steady increases in the interest rate, which it raised to 2.25 percent in late September. He likes low interest rates.

For instance, the September U.S.jobs report, which came out on October 5, found the unemployment rate had dropped to 3.7 per cent, a almost 50-year low; wage growth also strengthened.

In Europe this week, the closely-watched spread between the rates on 10-year bonds in Italy compared with those offered by Germany, which is a measure of the added risk perceived by investors to holding onto Italian debt, hit the highest level since April 2013.

Critics said it was convenient for Trump to blame the Fed when really his trade war with China- which is harming the global economy and raising prices for ordinary Americans - is to blame. Trump owes more than $300 million to Deutsche Bank AG of debt with interest rates that rise or fall depending on Fed policy.

Steven Mnuchin, Treasury Secretary, echoed that sentiment, referring to yesterday's stock market crash as a "correction". But the logic behind the Fed policy is not founded on inflation. The Fed was plowing ahead with rate increases, while investors were evidently skeptical that growth would be persistent enough to justify higher long-term rates.

Though Trump said he objected to the Fed's continual rate hikes, he said in response to a question that he would not seek to oust the chairman. When interest rates rise, bond yields typically do as well as investors pull money out of stocks and move them into bonds to capitalize on the higher (and safer) returns.

Both Powell and the president confirmed in recent days that they have not spoken to each other about interest rates.

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